UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ......... TO ..........
COMMISSION FILE NUMBER 1-7584
TRANSCONTINENTAL GAS PIPE LINE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 74-1079400
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2800 POST OAK BOULEVARD
P. O. BOX 1396
HOUSTON, TEXAS 77251
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (713) 215-2000
NONE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
--- ---
THE NUMBER OF SHARES OF COMMON STOCK, PAR VALUE $1.00 PER SHARE, OUTSTANDING AS
OF SEPTEMBER 30, 1999 WAS 100.
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS H(1)(a) AND
(b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM 10-Q WITH THE REDUCED
DISCLOSURE FORMAT.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
COMPANY OR GROUP OF COMPANIES FOR WHICH REPORT IS FILED:
TRANSCONTINENTAL GAS PIPE LINE CORPORATION AND SUBSIDIARIES (TRANSCO)
The accompanying interim condensed consolidated financial statements of
Transco do not include all notes in annual financial statements and therefore
should be read in conjunction with the consolidated financial statements and
notes thereto in Transco's 1998 Annual Report on Form 10-K and 1999 First and
Second Quarter Reports on Form 10-Q. The accompanying condensed consolidated
financial statements have not been audited by independent auditors but include
all adjustments both normal recurring and others which, in the opinion of
Transco's management, are necessary to present fairly its financial position at
September 30, 1999, and results of operations for the three and nine months
ended September 30, 1999 and 1998, and cash flows for the nine months ended
September 30, 1999 and 1998.
Certain matters discussed in this report, excluding historical information,
include forward-looking statements. Although Transco believes such
forward-looking statements are based on reasonable assumptions, no assurance can
be given that every objective will be achieved. Such statements are made in
reliance on the "safe harbor" protections provided under the Private Securities
Reform Act of 1995. Additional information about issues that could lead to
material changes in performance is contained in Transco's 1998 Annual Report on
Form 10-K, 1999 First and Second Quarter Reports on Form 10-Q and Year 2000
disclosure contained in this document.
<PAGE>
TRANSCONTINENTAL GAS PIPE LINE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
----------------- -----------------
ASSETS
<S> <C> <C>
Current Assets:
Cash $ 1,924 $ 1,470
Receivables:
Affiliates 571 10,892
Others 20,187 21,689
Advances to affiliates 460,399 416,164
Transportation and exchange gas receivables:
Affiliates 1,590 1,370
Others 30,662 56,475
Inventories 74,798 79,787
Deferred income taxes 107,560 99,598
Other 17,628 16,714
----------------- -----------------
Total current assets 715,319 704,159
----------------- -----------------
Long-term advances to affiliates 7,398 -
----------------- -----------------
Investments, at cost plus equity in undistributed earnings 31,429 8,915
----------------- -----------------
Property, Plant and Equipment:
Natural gas transmission plant 4,296,682 4,259,502
Less-Accumulated depreciation and amortization 667,720 616,120
----------------- -----------------
Total property, plant and equipment, net 3,628,962 3,643,382
----------------- -----------------
Other Assets 175,816 168,495
----------------- -----------------
$ 4,558,924 $ 4,524,951
================= =================
The accompanying condensed notes are an integral part of these condensed consolidated financial statements.
</TABLE>
<PAGE>
TRANSCONTINENTAL GAS PIPE LINE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET (Continued)
(Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---------------- ----------------
LIABILITIES AND STOCKHOLDER'S EQUITY
<S> <C> <C>
Current Liabilities:
Payables:
Affiliates $ 68,927 $ 25,050
Others 68,149 72,285
Transportation and exchange gas payables:
Affiliates 376 379
Others 11,137 8,354
Accrued liabilities 127,218 156,631
Reserve for rate refunds 159,409 238,403
---------------- ----------------
Total current liabilities 435,216 501,102
---------------- ----------------
Long-Term Debt, less current maturities 975,443 975,768
---------------- ----------------
Other Long-Term Liabilities:
Deferred income taxes 858,538 846,306
Other 113,811 139,734
---------------- ----------------
Total other long-term liabilities 972,349 986,040
---------------- ----------------
Commitments and contingencies (Note 3)
Common Stockholder's Equity:
Common stock $1.00 par value:
100 shares authorized, issued and outstanding - -
Premium on capital stock and other paid-in capital 1,652,430 1,652,430
Retained earnings 523,486 409,611
---------------- ----------------
Total common stockholder's equity 2,175,916 2,062,041
---------------- ----------------
$ 4,558,924 $ 4,524,951
================ ================
The accompanying condensed notes are an integral part of these condensed consolidated financial statements.
</TABLE>
<PAGE>
TRANSCONTINENTAL GAS PIPE LINE CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
September 30
----------------------------------------
1999 1998
----------------- -----------------
<S> <C> <C>
Operating Revenues:
Natural gas sales $ 195,715 $ 125,576
Natural gas transportation 152,964 160,753
Natural gas storage 33,825 35,993
Other 2,147 1,811
----------------- -----------------
Total operating revenues 384,651 324,133
----------------- -----------------
Operating Costs and Expenses:
Cost of natural gas sales 195,715 125,576
Cost of natural gas transportation 6,893 11,938
Operation and maintenance 41,241 44,311
Administrative and general 31,242 30,852
Depreciation and amortization 40,268 39,744
Taxes - other than income taxes 9,107 9,305
Other 901 1,815
----------------- -----------------
Total operating costs and expenses 325,367 263,541
----------------- -----------------
Operating Income 59,284 60,592
----------------- -----------------
Other (Income) and Other Deductions:
Interest expense 20,282 23,769
Interest income - affiliates (6,640) (7,241)
Allowance for equity and borrowed funds used during construction (AFUDC) (1,479) (3,316)
Miscellaneous other (income) deductions, net 37 (236)
----------------- -----------------
Total other deductions 12,200 12,976
----------------- -----------------
Income before Income Taxes 47,084 47,616
Provision for Income Taxes 17,762 18,000
----------------- -----------------
Net Income $ 29,322 $ 29,616
================= =================
The accompanying condensed notes are an integral part of these condensed consolidated financial statements.
</TABLE>
<PAGE>
TRANSCONTINENTAL GAS PIPE LINE CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30
----------------------------------------
1999 1998
----------------- -----------------
<S> <C> <C>
Operating Revenues:
Natural gas sales $ 512,063 $ 401,533
Natural gas transportation 506,681 481,633
Natural gas storage 102,718 108,115
Other 7,726 6,660
----------------- -----------------
Total operating revenues 1,129,188 997,941
----------------- -----------------
Operating Costs and Expenses:
Cost of natural gas sales 512,063 401,533
Cost of natural gas transportation 28,534 32,891
Operation and maintenance 123,550 127,051
Administrative and general 98,806 92,241
Depreciation and amortization 120,655 111,526
Taxes - other than income taxes 26,116 27,091
Other 2,673 2,605
----------------- -----------------
Total operating costs and expenses 912,397 794,938
----------------- -----------------
Operating Income 216,791 203,003
----------------- -----------------
Other (Income) and Other Deductions:
Interest expense 52,209 69,158
Interest income - affiliates (18,034) (20,884)
Allowance for equity and borrowed funds used during construction (AFUDC) (3,473) (7,989)
Miscellaneous other deductions, net 1,756 660
----------------- -----------------
Total other deductions 32,458 40,945
----------------- -----------------
Income before Income Taxes 184,333 162,058
Provision for Income Taxes 70,458 61,492
----------------- -----------------
Net Income $ 113,875 $ 100,566
================= =================
The accompanying condensed notes are an integral part of these condensed consolidated financial statements.
</TABLE>
<PAGE>
TRANSCONTINENTAL GAS PIPE LINE CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30
---------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 113,875 $ 100,566
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 124,528 116,413
Deferred income taxes 4,270 (2,370)
Allowance for equity funds used during construction (AFUDC) (2,414) (5,845)
Changes in operating assets and liabilities:
Receivables (31) 18,836
Receivables sold 13,000 (12,000)
Transportation and exchange gas receivables 25,593 1,589
Inventories 4,989 1,603
Payables 47,309 (22,994)
Transportation and exchange gas payables 2,780 (6,818)
Accrued liabilities (28,470) 23,183
Reserve for rate refunds (78,994) 101,929
Other, net (37,726) (32,377)
------------- -------------
Net cash provided by operating activities 188,709 281,715
------------- -------------
Cash flows from financing activities:
Additions to long-term debt - 298,343
Retirement of long-term debt - (160,000)
Debt issue costs - (2,060)
------------- -------------
Net cash provided by financing activities - 136,283
------------- -------------
Cash flows from investing activities:
Property, plant and equipment:
Additions, net of equity AFUDC (108,590) (233,807)
Changes in accounts payable (7,596) (9,552)
Advances to affiliates, net (51,633) (177,236)
Investments in affiliates (21,331) (1,919)
Other, net 895 3,996
------------- -------------
Net cash used in investing activities (188,255) (418,518)
------------- -------------
Net increase (decrease) in cash 454 (520)
Cash at beginning of period 1,470 1,321
------------- -------------
Cash at end of period $ 1,924 $ 801
============= =============
Supplemental disclosures of cash flow information:
Cash paid during the year for :
Interest (exclusive of amount capitalized) $ 76,797 $ 47,797
Income taxes paid 68,796 61,584
Income tax refunds received - (77)
The accompanying condensed notes are an integral part of these condensed consolidated financial statements.
</TABLE>
<PAGE>
TRANSCONTINENTAL GAS PIPE LINE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. CORPORATE STRUCTURE AND CONTROL
Transcontinental Gas Pipe Line Corporation (Transco) is a wholly-owned
subsidiary of Williams Gas Pipeline Company (WGP). WGP is a wholly-owned
subsidiary of The Williams Companies, Inc. (Williams).
2. BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of
Transco and its majority-owned subsidiaries. Companies in which Transco and its
subsidiaries own 20 percent to 50 percent of the voting common stock are
accounted for under the equity method. Equity in earnings and losses of
unconsolidated affiliates is included in other operating revenues.
The condensed consolidated financial statements have been prepared from
the books and records of Transco without audit. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted.
These condensed consolidated financial statements should be read in conjunction
with the consolidated financial statements and the notes thereto included in
Transco's 1998 Annual Report on Form 10-K and 1999 First and Second Quarter
Reports on Form 10-Q.
Through an agency agreement, Williams Energy Services Company (WESCO), an
affiliate of Transco, manages all jurisdictional merchant gas sales of Transco,
receives all margins associated with such business and, as Transco's agent,
assumes all market and credit risk associated with Transco's jurisdictional
merchant gas sales. Consequently, Transco's merchant gas sales service has no
impact on its operating income or results of operations.
Because of its rate structure and historical maintenance schedule, Transco
typically experiences lower operating income in the second and third quarters as
compared to the first and fourth quarters.
Certain reclassifications have been made in the 1998 financial
statements to conform to the 1999 presentation.
3. CONTINGENT LIABILITIES AND COMMITMENTS
There have been no new developments from those described in Transco's 1998
Annual Report on Form 10-K or 1999 First and Second Quarter Reports on Form 10-Q
other than as described below.
<PAGE>
RATE AND REGULATORY MATTERS
PRODUCTION AREA RATE DESIGN (DOCKET NOS. RP92-137, RP93-136 AND RP98-381)
Transco has expressed to the Federal Energy Regulatory Commission (FERC)
concerns that inconsistent treatment under Order 636 of Transco and its
competitor pipelines with regard to rate design and cost allocation issues in
the production area may result in rates which could make Transco less
competitive, both in terms of production-area and long-haul transportation. A
hearing before a FERC Administrative Law Judge (ALJ) (Docket Nos. RP92-137 and
RP93-136), dealing with, among other things, Transco's production-area rate
design, concluded in June 1994. On July 19, 1995, the ALJ issued an initial
decision finding that Transco's proposed production area rate design, and its
existing use of a system wide cost of service and allocation of firm capacity in
the production area are unjust and unreasonable. The ALJ therefore recommended
that Transco divide its costs between its production area and market area, and
permit its customers to renominate their firm entitlements.
On July 3, 1996, the FERC issued an order on review of the ALJ's initial
decision concerning, among other things, Transco's production area rate design.
The FERC rejected the ALJ's recommendations that Transco divide its costs
between its production area and market area, and permit its customers to
renominate their firm entitlements. The FERC also concluded that Transco may
offer firm service on its supply laterals through an open season and eliminate
its IT feeder service in favor of an interruptible service option that does not
afford shippers feeding firm transportation on Transco's production area
mainline a priority over other interruptible transportation. On December 18,
1996, the FERC denied rehearing of its July 3, 1996 Order. Several parties,
including Transco, have filed petitions for review in the United States Court of
Appeals for the District of Columbia (D.C. Circuit Court) of the FERC's orders
addressing production area rate design issues. On November 4, 1998, the D.C.
Circuit Court issued an order granting the FERC's motion to hold these appeals
in abeyance pending the outcome of the proceedings in Transco's Docket No.
RP98-381. On October 7, 1999, in light of the FERC's orders rejecting Transco's
proposal in Docket No. RP98-381, the D.C. Circuit Court issued an order
restoring the appeals to the active docket.
TILDEN/MCMULLEN FACILITIES SPIN-DOWN PROCEEDING (DOCKET NOS. CP98-236 AND
242) In February 1998, Transco filed an application with the FERC seeking
authorization to abandon Transco's onshore Tilden/McMullen Gathering System
located in Texas by conveyance to Williams Gas Processing - Gulf Coast Company
(Gas Processing), an affiliate of Transco. Gas Processing filed a
contemporaneous request that the FERC declare that the facilities sought to be
abandoned would be considered nonjurisdictional gathering facilities upon
transfer to Gas Processing. In May 1999, the FERC issued an order in which it
determined that certain of the facilities would be gathering facilities upon
transfer to Gas Processing, i.e., 1) those facilities upstream of and including
the Tilden Plant, 2) the South McMullen and Goebel Laterals located downstream
of the Tilden Plant, and 3) the small, short laterals which branch out from the
McMullen Lateral downstream of the Tilden Plant at several points along its
length. However, the FERC determined that the McMullen Lateral itself, as well
as two compressor units, are jurisdictional facilities, but authorized their
abandonment subject to Gas Processing obtaining a certificate to operate those
facilities. The net book value at September 30, 1999 of the Tilden/McMullen
facilities was approximately $67 million. Operating income for the year ended
December 31, 1998 associated with those facilities is estimated to be less than
$3 million; however, such operating income may not be representative of the
effects of the spin-down on Transco's future operating income due to various
factors, including future regulatory actions. Transco's abandonment authority is
effective for one year from the date of issuance of the order. Transco must
notify the FERC of the effective date of the abandonment within 10 days of the
transfer. On June 3, 1999, Transco and Gas Processing filed for rehearing of the
order with regard to the facilities classified by the FERC as jurisdictional
facilities, and on October 5, 1999, the FERC denied the rehearing request.
<PAGE>
LEGAL PROCEEDINGS
OTHER LITIGATION In 1998, the United States Department of Justice informed
Williams that Jack Grynberg, an individual, had filed claims in the United
States District Court for the District of Colorado under the False Claims Act
against Williams and certain of its wholly owned subsidiaries, including
Transco. Mr. Grynberg has also filed claims against approximately 300 other
energy companies and alleges that the defendants violated the False Claims Act
in connection with the measurement and purchase of hydrocarbons. The relief
sought was an unspecified amount of royalties allegedly not paid to the federal
government, treble damages, a civil penalty, attorneys' fees, and costs. On
April 9, 1999, the United States Department of Justice announced that it was
declining to intervene in any of the Grynberg qui tam cases; including the
action filed against the Williams entities in the United States District Court
for the District of Colorado. On October 21, 1999, the Panel on Multi-District
Litigation transferred all of the Grynberg qui tam cases, including the ones
filed against Williams, to the United States District Court for the District of
Wyoming for pre-trial purposes.
ENVIRONMENTAL MATTERS
In July 1999, Transco received a letter stating that the U.S. Department
of Justice (DOJ), at the request of the U.S. Environmental Protection Agency
(EPA), intends to file a civil action against Transco arising from its waste
management practices at Transco's compressor stations and metering stations
located in eleven (11) states from Texas to New Jersey. DOJ stated in the letter
that its complaint will seek civil penalties and injunctive relief under federal
environmental laws.
DOJ offered to discuss settlement of the claim and discussions began in
September 1999. While no specific amount was proposed, DOJ stated that any
settlement must include an appropriate civil penalty for the alleged violations.
Transco cannot reasonably estimate the amount of its potential liability,
if any, at this time. However, Transco believes it has substantially addressed
environmental concerns on its system through ongoing voluntary remediation and
management programs.
<PAGE>
SUMMARY
While no assurances may be given, Transco does not believe that the
ultimate resolution of the foregoing matters and those described in Transco's
1998 Annual Report on Form 10-K and 1999 First and Second Quarter Reports on
Form 10-Q, taken as a whole and after consideration of amounts accrued, recovery
from customers, insurance coverage or other indemnification arrangements, will
have a materially adverse effect upon Transco's future financial position,
results of operations and cash flow requirements.
4. DEBT AND FINANCING ARRANGEMENTS
LONG-TERM DEBT
Williams and certain of its subsidiaries, including Transco, are parties
to a $1 billion credit agreement (Credit Agreement), under which Transco can
borrow up to $400 million if the funds available under the Credit Agreement have
not been borrowed by Williams or other subsidiaries. Interest rates vary with
current market conditions based on the base rate of Citibank N.A., three-month
certificates of deposit of major United States money market banks, federal funds
rate or the London Interbank Offered Rate. The Credit Agreement contains
restrictions which limit, under certain circumstances, the issuance of
additional debt, the attachment of liens on any assets and any change of
ownership of Transco. As of September 30, 1999, Transco had no outstanding
borrowings under this agreement.
SHORT-TERM DEBT
Transco is a party to a short-term money market facility under which it
can borrow up to $40 million. Interest rates vary with current market conditions
based on the applicable bank rate at the time of the borrowings. As of September
30, 1999, Transco had no outstanding borrowings under these facilities.
SALE OF RECEIVABLES
Transco is a party to an agreement that expires on January 28, 2000
pursuant to which Transco can sell to an investor up to $100 million of
undivided interest in certain of its trade receivables. At September 30, 1999
and December 31, 1998, interests in these receivables held by the investor were
$100 million and $87 million, respectively.
<PAGE>
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with the
consolidated financial statements, notes and management's narrative analysis
contained in Items 7 and 8 of Transco's 1998 Annual Report on Form 10-K and in
Transco's 1999 First and Second Quarter Reports on Form 10-Q and with the
condensed consolidated financial statements and notes contained in this report.
RESULTS OF OPERATIONS
NET INCOME AND OPERATING INCOME
Transco's net income for the nine months ended September 30, 1999 was
$113.9 million compared to net income of $100.6 million for the nine months
ended September 30, 1998. Operating income for the nine months ended September
30, 1999 was $216.8 million compared to $203.0 million for the nine months ended
September 30, 1998. The higher operating income of $13.8 million was primarily
the result of higher transportation revenues and lower operation and maintenance
expense, partially offset by higher administrative and general expense and
depreciation and amortization expense discussed below. The increase in net
income was attributable to the increased operating income, as well as, lower net
interest expense due primarily to the adjustment to reserves for rate refunds
discussed below and rate refunds made in 1998 and early 1999, partially offset
by lower allowance for funds used during construction due to lower capital
expenditures.
Because of its rate structure and historical maintenance schedule, Transco
typically experiences lower operating income in the second and third quarters as
compared to the first and fourth quarters.
TRANSPORTATION REVENUES
Transco's operating revenues related to its transportation services for
the nine months ended September 30, 1999 were $507 million, compared to $482
million for the nine months ended September 30, 1998. The higher transportation
revenues were primarily due to a positive adjustment to the reserve for rate
refunds in Transco's general rate case Docket No. RP95-197 ($28.1 million),
benefits of expansion projects placed into service in 1998 ($13.4 million) and
new services begun in 1998 ($2.6 million). These increases were partly offset by
a decrease in commodity revenues ($8.6 million) due primarily to lower long-haul
and production-area volumes, a lower level of reimbursable costs ($4.2 million)
that are included in operating expenses and recovered in Transco's rates and the
positive impact of a $4 million adjustment recorded in 1998 related to
settlement rates contained in the January 1998 stipulation and agreement in
Transco's general rate case Docket No. RP97-71 approved by the FERC in June
1998.
<PAGE>
During the first half of 1999, Transco engaged in an analysis of the court
appeal related to Transco's general rate case Docket No. RP95-197 and,
particularly, its likely results. Based on developments in regulatory
proceedings in the second quarter of 1999 involving Transco and others, and
advice received from counsel, Transco adjusted its remaining reserve for rate
refunds ($28.1 million of principal and $5.9 million of interest) in the second
quarter of 1999 to reflect the FERC's revised rate of return methodology as
applied in the July 29, 1998, and December 1, 1998 orders.
As shown in the table below, Transco's total market-area deliveries for
the nine months ended September 30, 1999 increased 41.7 trillion British Thermal
Units (TBtu) (4.1%) when compared to the same period in 1998. The increased
deliveries were mainly due to higher deliveries under the Mobile Bay Lateral
Expansion Project and the Cherokee Expansion Project in the first nine months of
1999. Transco's production area deliveries for the nine months ended September
30, 1999 decreased 5.0 TBtu (3.0%) when compared to the same period in 1998 as a
result of milder weather conditions.
As a result of a straight fixed-variable (SFV) rate design, increases or
decreases in firm transportation volumes in comparable facilities have no
significant impact on operating income; however, because interruptible
transportation rates have components of fixed and variable cost recovery,
increases or decreases in interruptible transportation volumes do have an impact
on operating income.
Nine Months
Ended September 30,
-------------------------
Transco System Deliveries (TBtu) 1999 1998
- -------------------------------- ---------- ----------
Market-area deliveries:
Long-haul transportation 626.8 651.3
Market-area transportation 435.2 369.0
---------- ----------
Total market-area deliveries 1,062.0 1,020.3
Production-area transportation 161.0 166.0
---------- ----------
Total system deliveries 1,223.0 1,186.3
========== ==========
Average Daily Transportation Volumes (TBtu) 4.5 4.3
Average Daily Firm Reserved Capacity (TBtu) 6.3 6.4
Transco's facilities are divided into seven rate zones. Four are located in
the production area and three are located in the market area. Long-haul
transportation is gas that is received in one of the production-area zones and
delivered in a market-area zone. Market-area transportation is gas that is both
received and delivered within market-area zones. Production-area transportation
is gas that is both received and delivered within production-area zones.
See Note 3 of the Notes to Condensed Consolidated Financial Statements for
a discussion of recent developments in Transco's rate and regulatory matters.
<PAGE>
SALES REVENUES
Transco makes jurisdictional merchant gas sales to customers pursuant to a
blanket sales certificate issued by the FERC, with most of those sales being
made through a Firm Sales (FS) program which gives customers the option to
purchase daily quantities of gas from Transco at market-responsive prices in
exchange for a demand charge payment.
Through an agency agreement with Transco, WESCO, an affiliate of Transco,
manages Transco's jurisdictional merchant gas sales. The long-term purchase
agreements managed by WESCO remain in Transco's name, as do the corresponding
sales of such purchased gas. Therefore, Transco continues to record natural gas
sales revenues and the related accounts receivable and cost of natural gas sales
and the related accounts payable for the jurisdictional merchant sales that are
managed by WESCO. Through the agency agreement, WESCO receives all margins
associated with jurisdictional merchant gas sales business and, as Transco's
agent, assumes all market and credit risk associated with Transco's
jurisdictional merchant gas sales. Consequently, Transco's merchant gas sales
service has no impact on Transco's operating income or results of operations.
Transco's operating revenues for the nine months ended September 30, 1999
related to its sales services, including Transco's cash out sales in settlement
of gas imbalances, increased $110.5 million to $512 million, when compared to
the same period in 1998. The increase was primarily due to higher cash out sales
related to the settlement of imbalances, higher sales volumes and a slightly
higher average sales price.
Nine Months
Ended September 30,
-------------------------
Gas Sales Volumes (TBtu) 1999 1998
- ------------------------ -------- --------
Long-term sales 150.1 135.7
Short-term sales 28.1 18.3
-------- --------
Total gas sales 178.2 154.0
======== ========
STORAGE REVENUES
Transco's operating revenues related to storage services decreased $5.4
million to $102.7 million for the nine months ended September 30, 1999 when
compared to the same period in 1998. This revenue decrease included a $5.7
million decrease due to lower underground storage rates charged by others, the
majority of which is included in operation and maintenance expenses and a $1.2
million decrease primarily due to lower storage demand charges, partly offset by
the impact of an adjustment recorded in 1998 to the revenue refund reserve to
reflect the actual rates contained in the RP97-71 Settlement Agreement.
<PAGE>
OPERATING COSTS AND EXPENSES
Excluding the cost of sales and transportation of $541 million for the
nine months ended September 30, 1999 and $434 million for the comparable period
in 1998, Transco's operating expenses for the nine months ended September 30,
1999, were approximately $11.3 million higher than the comparable period in
1998. This increase was primarily attributable to higher administrative and
general expense and higher depreciation and amortization expense partially
offset by lower operation and maintenance expense. The higher administrative and
general expense was primarily attributable to higher professional services ($1.5
million), building rent ($1.2 million), pension expense ($1.1 million) and labor
($2.3 million). The higher depreciation and amortization expense was due to a
$3.8 million adjustment related to the RP97-71 settlement rates recorded in
1998, a $3.2 million adjustment on computer software recorded in 1998 and a $2.2
million increase in 1999, primarily due to plant and property additions. Lower
operation and maintenance expense was primarily attributable to lower
underground storage rates charged by others ($5.5 million), lower professional
services ($2.1 million) and lower contractual services ($1.5 million), partly
offset by the effects of a $5.7 million adjustment recorded in 1998 related to
the RP97-71 settlement rates.
CAPITAL RESOURCES AND LIQUIDITY
METHOD OF FINANCING
Transco funds its capital requirements with cash flows from operating
activities, including the sale of trade receivables, by accessing capital
markets, by repayments of funds advanced to Williams, by borrowings under the
Credit Agreement and short-term money market facilities and, if required,
advances from Williams. At September 30, 1999, there were no outstanding
borrowings under the Credit Agreement or short-term money market facilities.
As a participant in Williams' cash management program, Transco and its
subsidiaries have made advances to Williams. At September 30, 1999, net advances
due Transco and its subsidiaries by Williams totaled $460 million. Additionally,
Transco has made advances to WGP. At September 30, 1999, the advances due
Transco by WGP totaled $7.4 million and was classified as a long-term advance in
the accompanying Condensed Consolidated Balance Sheet.
CAPITAL EXPENDITURES AND INVESTMENTS IN AFFILIATES
As shown in the table below, Transco's capital expenditures and investments
in affiliates for the nine months ended September 30, 1999 were $ 137.5 million,
compared to $245.3 million for the nine months ended September 30, 1998.
[CAPTION]
<TABLE>
Nine Months
Ended September 30,
----------------------
Capital Expenditures and Investments in Affiliates 1999 1998
- -------------------------------------------------- --------- ---------
(In Millions)
<S> <C> <C>
Market-area projects $ 25.5 $ 79.9
Supply-area projects (1.8) 113.2
Maintenance of existing facilities and other projects 92.5 50.3
Investments in affiliates 21.3 1.9
--------- ---------
Total capital expenditures and investments in affiliates $ 137.5 $ 245.3
========= =========
</TABLE>
<PAGE>
Transco's capital expenditures budget for 1999 and future capital projects
are discussed in its 1998 Annual Report on Form 10-K and 1999 First and Second
Quarter Reports on Form 10-Q. The following describes significant developments
related to those projects and any new projects proposed by Transco.
BUCCANEER PIPELINE PROJECT On October 28, 1999, Buccaneer Gas Pipeline
Company, L.L.C. (Buccaneer), a wholly-owned subsidiary of Transco, filed an
application with the Federal Energy Regulatory Commission for certificate
authorization of its proposed natural gas pipeline project extending from the
Mobile Bay area in Alabama to delivery points in Florida. The application states
that Buccaneer's pipeline system will be designed to transport up to 900,000
dekatherms (dt) of natural gas per day. The proposed in-service date of the
pipeline is April 1, 2002. Buccaneer estimates that the total cost of the
project will be approximately $1.455 billion. Buccaneer is proposing a 75/25
debt to equity capital structure and will seek non-recourse project financing.
CARDINAL PIPELINE PROJECT On November 1, 1999, Cardinal Extension Company,
LLC, a North Carolina limited liability company formed between wholly-owned
subsidiaries of Transco and three of Transco's North Carolina customers, placed
its pipeline project into service. The project involved the acquisition of an
existing 37-mile pipeline in North Carolina and the construction of
approximately 67 miles of pipeline to new interconnections in Clayton County,
North Carolina. The pipeline provides transportation service of up to 270,000
Mcf of natural gas per day. The total cost to complete the project was
approximately $98 million. Transco's wholly-owned subsidiary holds a 45%
ownership interest in Cardinal. A separate wholly owned subsidiary of Transco is
the operator of Cardinal.
OTHER CAPITAL REQUIREMENTS AND CONTINGENCIES
Transco's capital requirements and contingencies are discussed in its 1998
Annual Report on Form 10-K and 1999 First and Second Quarter Reports on Form
10-Q. Other than as described in Note 3 of the Notes to Condensed Consolidated
Financial Statements, there have been no new developments from those described
in Transco's 1998 Annual Report on Form 10-K and 1999 First and Second Quarter
Reports on Form 10-Q with regard to other capital requirements and
contingencies.
RATE AND REGULATORY REFUNDS Transco has provided reserves which it
believes are adequate for any rate refunds that may be required.
<PAGE>
YEAR 2000 COMPLIANCE Williams and its wholly-owned subsidiaries, which
includes Transco, initiated an enterprise-wide project in 1997 to address the
year 2000 compliance issue for both traditional and non-traditional information
technology areas, including embedded technology which is prevalent throughout
the company. The project focuses on all technology hardware and software,
external interfaces with customers and suppliers, operations process control,
automation and instrumentation systems, and facility items. The phases of the
project are awareness, inventory and assessment, renovation and replacement,
testing and validation, and contingency planning. The awareness and
inventory/assessment phases of this project as they relate to both traditional
and non-traditional information technology areas have been completed. During the
inventory and assessment phase, all systems with possible year 2000 implications
were inventoried and classified into five categories: 1) highest, business
critical, 2) high, compliance necessary within a short period of time following
January 1, 2000, 3) medium, compliance necessary within 30 days from January 1,
2000, 4) low, compliance desirable but not required, and 5) unnecessary.
Categories 1 through 3 were designated as critical and are the major focus of
this project. Renovation/replacement and testing/validation of critical systems
has been completed. While year 2000 date processes have been successfully
validated, ongoing testing will continue to ensure data integrity and core
functionality. Certain non-critical systems may not be compliant by January 1,
2000.
Testing and validation activities have been completed and at September 30,
1999, 100% of the critical systems have been fully tested or validated as
compliant. Year 2000 test labs remain in place and operational. As was expected,
few problems have been detected during testing for items believed to be
compliant.
Transco has initiated a formal communications process with other companies
with which Transco's systems interface or rely on to determine the extent to
which those companies are addressing their year 2000 compliance. In connection
with this process, Transco has sent more than 3,100 letters and questionnaires
to third parties including customers, vendors, and service providers. Transco is
evaluating responses as they are received or otherwise investigating the status
of these companies' year 2000 compliance efforts. Because only approximately 21
percent of the companies contacted have responded to this inquiry (all of these
have indicated that they are already compliant or will be compliant on a timely
basis), Transco has also been working directly with key business partners to
reduce the risk of a break in service or supply and with non-compliant companies
to mitigate any material adverse effect on Transco.
Transco has utilized both internal resources and external contractors to
complete the year 2000 compliance project. Transco has a core group of 121
people assigned to this project. This group includes one individual responsible
for coordinating, organizing, managing, communicating, and monitoring the
project and another 120 part-time representatives responsible for completing the
project. Depending on which phase the project is in and what area is being
focused on at any given point in time, there can be an additional 36 to 40
employees who are also contributing a portion of their time to the completion of
this project. Transco has contracted with an external contractor for a cost of
up to $6.0 million for the remediation of Transco's customer service system.
<PAGE>
Although all critical systems over which Transco has control are planned
to be compliant and tested before the year 2000, Transco has identified an area
that would equate to a most reasonably likely worst case scenario. There is the
possibility of service interruptions due to non-compliance by third parties. For
example, power failures along the communications network or transportation
systems could cause service interruptions. This risk should be minimized by the
enterprise-wide communications effort with and evaluation of third-party
compliance plans and by the development of contingency plans. It is not possible
to quantify the possible financial impact if this most reasonably likely worst
case scenario were to come to fruition.
Significant focus on the contingency plan phase of the project has been
taking place in 1999. Guidelines for the contingency planning process were
issued in January 1999. Contingency plans have been developed for critical
business processes, critical business partners, suppliers and system
replacements that experience significant delays. Transco's contingency plans
include manning all operational stations twenty-four hours a day, putting extra
security measures into place and stocking up on supplies. In addition, most of
Transco's compressor stations are capable of independently generating
electricity in the event of a loss of electricity, and operation of the pipeline
can be done manually in case there is a loss of telecommunications capability.
These plans are subject to on-going review as we continue to assess the
readiness of vendors and suppliers, and make changes as appropriate.
Costs incurred for new software and hardware purchases are being
capitalized and other costs are being expensed as incurred. Transco currently
estimates the total cost of the project, including any accelerated system
replacements, to be approximately $7.8 million. This $7.8 million has been or is
expected to be spent as follows:
Prior to 1998 and during the first quarter of 1998, Transco conducted the
project awareness and inventory/assessment phases of the project and
incurred minimal costs.
During the second quarter of 1998, $0.1 million was spent on the
renovation/replacement and testing/validation phases and completion of the
inventory/assessment phase.
The third and fourth quarters of 1998, focused on the
renovation/replacement and testing/validation phases and $2.1 million of
costs were incurred.
During the first quarter of 1999, renovation/replacement and
testing/validation continued, contingency planning began and $2.0 million
was expended.
During the second quarter of 1999, the primary focus shifted to
testing/validation and contingency planning and $1.3 million was spent.
During the third quarter of 1999, contingency planning continued and final
testing began with $1.8 million spent.
The fourth quarter of 1999 will continue to focus mainly on completion of
contingency planning and final testing with $0.5 million expected to be
spent.
The amount estimated to be spent during the first two quarters of 2000 for
monitoring and problem resolution is considered minimal.
<PAGE>
Virtually all of the $7.3 million incurred through September 30, 1999 has
been expensed with a minimal amount capitalized. Of the $0.5 million of future
costs necessary to complete the project within the schedule described, virtually
all costs will be expensed, with a minimal amount capitalized. This estimate
does not include Transco's potential share of year 2000 costs that may be
incurred by partnerships and joint ventures in which the company participates
but is not the operator. The costs of previously planned system replacements are
not considered to be year 2000 costs and are, therefore, excluded from the
amounts discussed above.
The preceding discussion contains forward-looking statements including,
without limitation, statements relating to the company's plans, strategies,
objectives, expectations, intentions, and adequate resources, that are made
pursuant to the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995. Readers are cautioned that such forward-looking statements
contained in the year 2000 update are based on certain assumptions which may
vary from actual results. Specifically, the dates on which the company believes
the year 2000 project will be completed and computer systems will be implemented
are based on management's best estimates, which were derived utilizing numerous
assumptions of future events, including the continued availability of certain
resources, third-party modification plans and other factors. However, there can
be no guarantee that these estimates will be achieved, or that there will not be
a delay in, or increased costs associated with, the implementation of the year
2000 project. Other specific factors that might cause differences between the
estimates and actual results include, but are not limited to, the availability
and cost of personnel trained in these areas, the ability to locate and correct
all relevant computer code, timely responses to and corrections by third-parties
and suppliers, the ability to implement interfaces between the new systems and
the systems not being replaced, and similar uncertainties. Due to the general
uncertainty inherent in the year 2000 problem, resulting in large part from the
uncertainty of the year 2000 readiness of third-parties, the company cannot
ensure its ability to timely and cost-effectively resolve problems associated
with the year 2000 issue that may affect its operations and business, or expose
it to third-party liability.
CONCLUSION
Although no assurances can be given, Transco currently believes that the
aggregate of cash flows from operating activities, supplemented, when necessary,
by repayments of funds advanced to Williams, advances or capital contributions
from Williams and borrowings under the Credit Agreement or short-term money
market facilities, will provide Transco with sufficient liquidity to meet its
capital requirements. Transco also expects to access public and private markets
on reasonable terms to finance its capital requirements.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
See discussion in Note 3 of the Notes to Condensed Consolidated
Financial Statements included herein.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
None
(b) Reports on Form 8-K.
None
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
TRANSCONTINENTAL GAS PIPE LINE
CORPORATION (Registrant)
Dated: November 12, 1999 By /s/ James C. Bourne
-------------------------------
James C. Bourne
Controller
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AND THE CONDENSED CONSOLIDATED STATEMENT OF
INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999, CONTAINED IN
TRANSCONTINENTAL GAS PIPE LINE CORPORATION'S 1999 THIRD QUARTER REPORT ON FORM
10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,924
<SECURITIES> 0
<RECEIVABLES> 6,139
<ALLOWANCES> 0
<INVENTORY> 74,798
<CURRENT-ASSETS> 715,319
<PP&E> 4,296,682
<DEPRECIATION> 667,720
<TOTAL-ASSETS> 4,558,924
<CURRENT-LIABILITIES> 435,216
<BONDS> 975,443
0
0
<COMMON> 0
<OTHER-SE> 2,175,916
<TOTAL-LIABILITY-AND-EQUITY> 4,558,924
<SALES> 512,063
<TOTAL-REVENUES> 1,129,188
<CGS> 512,063
<TOTAL-COSTS> 810,918
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 52,209
<INCOME-PRETAX> 184,333
<INCOME-TAX> 70,458
<INCOME-CONTINUING> 113,875
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 113,875
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
